Scotsman Guide - February 2009 Commercial Edition

USDA Program Changes with the Times

Some developer clients might find missing financing pieces through rural-development product

By Michael Steininger, director of multifamily-housing guaranteed-loan division, U.S. Department of Agriculture Rural Development

In today’s market, commercial mortgage brokers need every tool at their disposal to help their clients purchase and develop properties. One possible solution for some clients may be the U.S. Department of Agriculture (USDA) Rural Development Guaranteed Rural Rental

Housing Program.

Through this program, USDA Rural Development gives lenders a market-driven product that helps developers construct and preserve affordable rental housing in rural America. In some cases, it can provide your developer clients with the missing financing piece to a development project.

By understanding the program’s features, you can help your clients determine whether this program can help them. In addition to understanding the program, brokers must know what changes the

Housing and Economic Recovery Act of 2008 made to the program and how they affect clients.

loan guarantee now works more like a traditional loan — but with an annual interest-credit payment.

The AFR effect

One key feature of the rural-rental program is an interest-credit component.

The agency provides lenders with annual interest-assistance payments to reduce the market interest rate. This often helps to make rents more affordable for tenants.

Previously, the interest-assistance payments created an effective interest rate to borrowers that equaled the applicable federal rate (AFR) at time of loan closing. The Housing and Economic Recovery Act eliminated the reference to the AFR in the Internal Revenue Service code to which the program’s statute referred.

Now, the department is no longer

“USDA Rural

Development gives

lenders a market-

driven product that

helps developers

construct and

preserve affordable

rental housing in

rural America.”

required to provide interest assistance equal to the AFR. Interest assistance now only is a function of the interest rate on the note negotiated between borrowers and lenders.

With the recent market changes, this change makes the program more flexible to interest-rate movement and loan-pricing changes. For an example of how the AFR requirement previously worked, consider a program that requires the effective interest rate (i.e., the note interest rate minus the interest assistance — typically 250 basis points) to be equal to the AFR at time of closing. Keep in mind that closing could be months after borrowers sign the loan agreements. For new construction or for any project that has multiple months’ lead time, forecasting the AFR far in advance is difficult.

Without being required to price the loan down to the AFR, lenders and borrowers now can allow the note interest rate to float and adjust regardless of the current or future AFR.

A freely floating effective rate to the borrower may not sound like much. But to lenders that use the program and to those that have looked into it, the

Other ways clients can benefit

The Guaranteed Rural Rental Housing Program provides as much as a 90-percent guarantee on loans’ principal and accrued interest. The program also can provide a guarantee on construction advances in addition to the permanent loan.

The rural-rental program includes other features, as well:

■ Loans can be amortized for as many
as 40 years.

Continued on Page 55

Michael Steininger is the director of the multifamily-housing guaranteed-loan division for the U.S. Department of Agriculture Rural Development. Steininger is responsible for the